This may lead to increased scrutiny of HRA claims, especially for high-value cases. Barring a few exceptions, the income tax department can reopen old income tax returns (ITRs) up to four years from the year of filing it. During this period, the taxpayers are expected to keep records of the deductions and exemptions claimed while filing their ITR.
Now, if you want to ensure that your genuine HRA tax exemption is accepted by the tax department while filing your income tax return (ITR), then you must keep certain proofs handy.
Here is a list of proofs to keep handy and things you must do to ensure that your HRA tax exemption is not rejected by the tax man.
1. Valid rent agreement: As a tenant, ensure that you have a valid rent agreement with your landlord. Further, the rent agreement must have certain clauses to ensure that it is compliant with income tax laws. For instance, if the monthly rent exceeds Rs 50,000, then TDS must be deducted from the rent. The rent agreement should specify if TDS is applicable, who will deduct it and how it will be deducted.
Apart from this, the rent agreement must have basic details of both, the tenant and landlord. Tax experts advise that it is a good practice to add PAN and Aadhaar of the tenant and landlord.Also Read: How rent agreement should look like if HRA tax exemption is claimed2. Rent receipts: Apart from a valid rent agreement, an individual must also collect rent receipts for the rent payment made. According to tax experts, a valid rent agreement may not be sufficient proof to claim HRA tax exemption. The rent receipts serve as evidence that the salaried employee has actually paid the rent amount during the financial year. The rent receipts must be collected even if rent is paid via electronic methods like net banking.
Further, an employer can demand proof of both, rent agreement as well as rent receipts, to deduct TDS on salary. If one document is missing, then higher tax can be deducted from your salary income by your employer.
Also Read: Are rent receipts, rent agreement mandatory for HRA tax exemptions?
3. Pay rent via banking channels: Chartered accountants say that rent should be paid via electronic channels such as Net banking, UPI etc. instead of cash. The rent payment made via banking channels keeps a record of the transactions. If the income tax department asks, the bank statement can serve as proof for the rent payment made.
Income tax rules restrict cash payments of Rs 2 lakh and above under Section 269ST of the Income-tax Act, 1961. According to tax experts, the payment of rent receipts in cash more than Rs 2 lakh can invite penalty under Section 271DA.
4. PAN of the landlord: If you are claiming HRA tax exemption from your employer, then you must mandatorily give your landlord’s PAN if rent paid exceeds Rs 1 lakh in a financial year. The income tax rules allow an individual to claim HRA tax exemption while filing ITR if the same is not claimed through the employer. Though the income tax department does not ask for landlord PAN while filing ITR, however, it is advisable to keep the copy of the PAN of the landlord in case the tax department asks for it later.
5. Paying rent to family members: Income tax laws do not restrict paying rent to family members. However, chartered accountants advise that individuals should make and keep the documents required even when the rent is paid to the family member or else the income tax department can reject the HRA tax exemption.
Apart from this, the individual should ask the family member to show the rent received as income in their tax return, if ITR filing is mandatory.
Also Read: Can you claim HRA tax exemption for rent paid to wife?
5 Essential HRA Tax Exemption Documents to Keep on Hand if Requested by Income Tax Department
These findings may result in increased scrutiny of HRA claims, particularly for high-value cases. In most cases, the income tax department can revisit old income tax returns up to four years after filing. Taxpayers must maintain records of deductions and exemptions claimed during the filing of their ITR during this period.
To ensure that your legitimate HRA tax exemption is accepted by the tax department when filing your income tax return (ITR), it’s essential to keep certain proofs handy.
Here are some proofs to keep ready and steps to take to prevent rejection of your HRA tax exemption.
1. Valid rent agreement: Tenants should have a valid rent agreement with their landlord, ensuring compliance with income tax laws. If the monthly rent exceeds Rs 50,000, TDS must be deducted. The agreement should specify if TDS is applicable, who will deduct it, and how it will be deducted. Including PAN and Aadhaar details of both tenant and landlord is advisable.
2. Rent receipts: In addition to a rent agreement, collecting rent receipts is crucial. Rent receipts serve as evidence of rent payments made during the financial year. Even if rent is paid electronically, rent receipts must be obtained. Employers may request both rent agreement and rent receipts to deduct TDS from salary income.
3. Pay rent via banking channels: Rent payments should be made through electronic channels to maintain transaction records. Bank statements can serve as proof of rent payments if required by the income tax department.
4. PAN of the landlord: Providing the landlord’s PAN is mandatory if rent paid exceeds Rs 1 lakh in a financial year. Keeping a copy of the landlord’s PAN is advisable in case it is requested later.
5. Paying rent to family members: Rent can be paid to family members, but necessary documentation should be maintained to avoid rejection of HRA tax exemption. Family members should show rent received as income in their tax return if required.
It’s important to adhere to these guidelines to ensure smooth processing of HRA tax exemptions and avoid any issues with the tax department.
